No, the Victims Did Not Cause the Recession

Here’s some important news via Wonkbook‘s Max Ehrenfreund (a name some of you may remember from his Weekend Blogging days here at PA).

Irresponsible lending might have been one of the many causes of the financial crisis — but not just irresponsible lending to poor people, according to a new study.

“The large majority of mortgage dollars originated between 2002 and 2006 are obtained by middle- and high-income borrowers (not the poor),” the authors write. “In addition, borrowers in the middle and top of the distribution are the ones that contributed most significantly to the increase in mortgages in default after 2007.” Rich people tend to take out larger mortgages, of course, but the fact is that the amount of money poor borrowers failed to pay back was just never that significant, as this chart from the paper shows. In case you have a hard time believing that so many larger mortgages could have gone into default, The Washington Post just published a series of stories on subprime, sometimes predatory lending in relatively affluent places such as Prince George’s County, Md., outside Washington, D.C.

The findings undermine criticism of recent modest efforts by the Obama administration to make housing more affordable for low-income borrowers by loosening federal credit standards. It’s important to lend responsibly, even for the federal government, but the risks in this case might be exaggerated.

This finding, of course, undermines more than fresh criticism of less restrictive housing credit. It undermines the whole Tea Party myth of the Great Recession: that it was the product of socialist bureaucrats, greedy bankers and those people to let the latter buy houses they could not afford or would not make payments on with every intention of dumping the debts on the hard-pressed taxpayer–and creating a “crisis” for which the “solution” would be more socialism.

If loose credit was a less important source of the housing “bubble” than we’ve been led to think, and if defaults were not concentrated among “those people,” then as Max suggests there’s no reason to act as though underwriting rules that exclude huge portions of the population came down from Mt. Sinai.

And you know what? If we are going to decide homeownership is simply going to have to be beyond the reach of those people, then how’s about a more balanced housing policy that offers some assistance to renters? That’s what the University of Texas’ Mechele Dickerson argues at TNR in a piece that is well worth your time.